Progressive 3Q 05 QSR

THE PROGRESSIVE CORPORATION 2005 THIRD QUARTER REPORT

The Progressive Corporation and Subsidiaries
Financial Highlights

Nine months ended
September 30, Years ended December 31,
(billions - except per share amounts)
2005 2004 2004 2003 2002 2001
Net premiums written $10.8 $10.0 $13.4 $11.9 $9.5 $7.3
Growth over prior period 7% 11% 12% 26% 30% 17%
Net premiums earned $10.3 $9.6 $13.2 $11.3 $8.9 $7.2
Growth over prior period 7% 16% 16% 28% 24% 13%
Total revenues $10.7 $10.1 $13.8 $11.9 $9.3 $7.5
Net income $1.11 $1.24 $1.65 $1.26 $.67 $.41

Underwriting margin 12.8% 15.0% 14.9% 12.7% 7.6% 4.8%
Net income per share - diluted $5.56 $5.62 $7.63 $5.69 $2.99 $1.83

(billions - except shares outstanding and per share amounts)
At Period-End
Common Shares outstanding 197.1 217.0 200.4 216.4 218.0 220.3
(millions)
Book value per share $29.48 $28.25 $25.73 $23.25 $17.28 $14.76
Consolidated shareholders' equity $5.8 $6.1 $5.2 $5.0 $3.8 $3.3
Market capitalization $20.7 $18.4 $17.0 $18.1 $10.8 $11.0
Return on average shareholders’ 28.3% 29.5% 30.0% 29.1% 19.3% 13.5%
equity1
Market share2 NA NA 7.7% 7.0% 6.0% 5.1%
Industry net premiums written3 NA NA $152.0 $151.0 $139.6 $127.9
4
Stock Price Appreciation (Depreciation)
Progressive 23.6% 1.5% 1.6% 68.7% (.1)% 44.1%
S&P 500 2.8% 1.5% 10.8% 28.6% (22.0)% (11.8)%

NA = Not Available

1
During the second quarter 2005, the Company began using trailing 12-month net income and average shareholders’ equity to
calculate its return on average shareholders’ equity, rather than annualized net income through the period; prior interim
periods have been restated.
2
Represents Progressive’s Personal Lines businesses as a percent of the U.S. personal auto insurance market.
3
Represents U.S. personal auto insurance market net premiums written as reported by A.M. Best Company, Inc.
4
Represents average annual compounded rate of increase (decrease) and assumes dividend reinvestment.

All share and per share amounts were adjusted for the April 22, 2002, 3-for-1 stock split.

1

Third Quarter 2005
Letter to Shareholders

Few in the insurance industry would describe the third quarter of 2005 with “business as usual”
commentary. Katrina, and to a lesser degree Rita, are replacing our memory of the names of the four
dominant storms from the third quarter of 2004 and recalibrating the extent of loss possible from such
natural disasters. Such is the case for Progressive, but the quarter was also highlighted by our entry into
a large state, continued favorable development of loss reserves against our prior expectations and solid,
if not robust, growth.

Third quarter shopping activity continued to reflect “soft market conditions” with prices subject to more
downward movement than increases. Quarterly growth of 5% on net premiums written and 6% on net
premiums earned was slightly slower than the year-to-date rates of 7% for both, signaling some
continued slowing. Our year-over-year premium per application was down about 5% for our Drive®
branded auto products and 2% for Progressive DirectSM products.

Policies in force is my preferred measure of growth, since it eliminates premium trends. Year-to-date,
our Personal Lines policies in force increased 10% (allocated between Drive auto at 6%, Direct auto at
12% and our special lines products at 14%) and were down slightly from the comparable second quarter
number of 11%. Similarly, our Commercial Auto increase in policies in force was 12%, down from
13% in the second quarter 2005. While we remain well prepared for additional growth, these results met
our expectations relative to the market. Perhaps the most notable commentary on growth continues to
be the relative strength of Internet-initiated business for Progressive Direct. In May, we provided ranges
for our new customer mix indicating 50% to 55% of our Direct business was Internet initiated versus
phone and of those about 60% to 65% completed their sale on the Internet without transferring to a call
center. We have now seen these ranges increase by about 5%.

Profitability for the quarter was strong almost belying the included catastrophes. The combined ratio of
90.4 had several moving parts. First, we continued to experience favorable frequency and even some
reduced claims activity throughout the country in the week or so following Hurricane Katrina. Second,
we incurred the addition of the hurricane losses for both Katrina and Rita. And third, we recognized a
continuation of “favorable” development of prior-year reserving. The $93.9 million of favorable
development during the quarter reflects the lower than estimated claim severity recognized on closed
claims as well as the application of that lower than estimated severity to those claims yet to be resolved.
While industry terminology uses the terms favorable and unfavorable to reflect net contribution to the
income statement, we never view significant reserve changes as “favorable” and strive to be accurate at

2

all times. We will continue to monitor both frequency and severity very closely and, if not perfect at
prediction, we expect to quickly reflect observations as they develop. We encourage readers of our
monthly financials to focus on the accident year loss/LAE ratio as the best indicator of current
performance.

Katrina was big in every sense. For Progressive, through the end of October, this translated into nearly
30,000 claim reports, and over 24,000 incurred claims, over 300,000 forms and pieces of mail, over
400,000 telephone calls, deployment of over 1,300 claims representatives and an expected loss of $185
million, approximately 5 ½ times our previous single highest claims event. Our claims organization has
been, and continues to be, a source of pride for Progressive and we believe our response to Katrina will
further our reputation in both responsiveness and quality of claims resolution. We have every reason to
believe that few, if any, companies responded as quickly or as comprehensively as Progressive. As of
the end of October, we have resolved over 90% of all Hurricane Katrina claims. As part of the decision
making associated with the storm, we concluded that cars significantly exposed to the contaminated
flood waters of Orleans and St. Bernard parishes and declared total losses by us should not find their
way back into the marketplace. As a result, we have been having these vehicles crushed, shredded and,
where possible, recycled. In the end, we expect to crush over 5,000 vehicles.

September 30 was the first day we offered personal auto insurance through Drive Insurance from
Progressive and Progressive Direct to New Jersey consumers. On Monday, October 3, Acting Governor
Richard J. Codey “officially” welcomed the entry of both brands to the state. Viewed individually, each
of our brands is in the top ten of all auto writers in the country. Our path to reentry into New Jersey has
been long, and often difficult, but we are very happy to be writing there. Our plans are to introduce our
Commercial Auto products later this year and motorcycle and boat products in 2006.

In summary - an eventful quarter with very respectable results. With Wilma highlighting the early
fourth quarter, all eyes will continue to be on our response and that of the industry.

Glenn M. Renwick
President and Chief Executive Officer

3

Consolidated Statements of Income
(unaudited)

Three Months Nine Months
% %
Periods Ended September 30, 2005 2004 Change 2005 2004 Change
(millions – except per share amounts)

Revenues:
Net premiums earned $3,478.9 $3,277.7 6 $10,282.7 $9,605.2 7
Investment income 138.0 124.8 11 388.2 364.4 7
Net realized gains (losses) on securities (4.1) 23.9 NM 2.3 80.0 (97)
Service revenues 9.7 12.1 (20) 31.2 36.6 (15)
Total revenues 3,622.5 3,438.5 5 10,704.4 10,086.2 6
Expenses:
Losses and loss adjustment expenses 2,467.8 2,171.7 14 6,901.0 6,224.5 11
Policy acquisition costs 364.7 353.5 3 1,087.0 1,035.8 5
Other underwriting expenses 312.2 303.7 3 977.8 904.1 8
Investment expenses 2.9 4.2 (31) 8.8 10.4 (15)
Service expenses 6.4 5.9 8 18.4 18.0 2
Interest expense 20.7 20.1 3 62.2 60.3 3
Total expenses 3,174.7 2,859.1 11 9,055.2 8,253.1 10

Income before income taxes 447.8 579.4 (23) 1,649.2 1,833.1 (10)
Provision for income taxes 142.5 190.5 (25) 536.9 597.9 (10)
Net income $305.3 $388.9 (21) $1,112.3 $1,235.2 (10)

COMPUTATION OF EARNINGS PER SHARE
Basic:
Average shares outstanding 195.8 216.0 (9) 197.3 216.2 (9)
Per share $1.56 $1.80 (13) $5.64 $5.71 (1)
Diluted:
Average shares outstanding 195.8 216.0 (9) 197.3 216.2 (9)
Net effect of dilutive stock-based
compensation 2.8 3.1 (10) 2.9 3.4 (15)
Total equivalent shares 198.6 219.1 (9) 200.2 219.6 (9)
Per share $1.54 $1.77 (13) $5.56 $5.62 (1)

$.030 $.030 -- $.090 $.080 13
Dividends per share

NM = Not Meaningful

See notes to consolidated financial statements.

4

Consolidated Balance Sheets
(unaudited)
September 30, December 31,
2005 2004 2004
(millions)
Assets
Investments - Available-for-sale, at market:
Fixed maturities (amortized cost: $10,420.3, $9,534.0 and $8,972.6) $10,397.8 $9,681.1 $9,084.3
Equity securities:
Preferred stocks (cost: $1,188.2, $723.4 and $749.4) 1,192.8 747.2 768.9
Common equities (cost: $1,413.0, $1,312.1 and $1,314.0) 2,016.9 1,686.7 1,851.9
Short-term investments (amortized cost: $918.9, $2,204.2 and $1,376.6) 919.2 2,204.2 1,376.9
Total investments 14,526.7 14,319.2 13,082.0
Cash 6.9 34.5 20.0
Accrued investment income 119.0 100.6 103.5
Premiums receivable, net of allowance for doubtful accounts of
$105.2, $70.6 and $83.8 2,627.7 2,397.6 2,287.2
Reinsurance recoverables, including $52.0, $43.6 and $44.5 on paid losses 391.4 295.3 381.6
Prepaid reinsurance premiums 114.6 125.9 119.8
Deferred acquisition costs 477.5 460.5 432.2
Income taxes 65.4 -- --
Property and equipment, net of accumulated depreciation of
$575.7, $537.6 and $562.1 695.8 674.6 666.5
Other assets 130.1 87.5 91.5
Total assets $19,155.1 $18,495.7 $17,184.3
Liabilities and Shareholders' Equity
Unearned premiums $4,575.9 $4,326.5 $ 4,108.0
Loss and loss adjustment expense reserves 5,737.4 5,156.0 5,285.6
Accounts payable, accrued expenses and other liabilities 1,746.5 1,548.6 1,325.0
Income taxes -- 43.4 26.0
Debt 1,284.8 1,290.2 1,284.3
Total liabilities 13,344.6 12,364.7 12,028.9
Shareholders' equity:
Common Shares, $1.00 par value (authorized 600.0; issued 213.1, 230.1 and
213.2, including treasury shares of 16.0, 13.1 and 12.8) 197.1 217.0 200.4
Paid-in capital 830.6 789.5 743.3
Unamortized restricted stock (68.9) (52.5) (46.0)
Accumulated other comprehensive income (loss):
Net unrealized gains on securities 381.1 354.6 435.1
Net unrealized gains on forecasted transactions 8.9 10.0 9.7
Foreign currency translation adjustment -- (3.9) --
Retained earnings 4,461.7 4,816.3 3,812.9
Total shareholders' equity 5,810.5 6,131.0 5,155.4
Total liabilities and shareholders' equity $19,155.1 $18,495.7 $17,184.3


5

Consolidated Statements of Cash Flows
(unaudited)

Nine Months Ended September 30, 2005 2004
(millions)

Cash Flows From Operating Activities
Net income $1,112.3 $1,235.2
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 68.5 72.4
Amortization of fixed maturities 140.3 129.9
Amortization of restricted stock 24.0 16.9
Net realized (gains) losses on securities (2.3) (80.0)
Changes in:
Unearned premiums 467.9 431.8
Loss and loss adjustment expense reserves 451.8 579.7
Accounts payable, accrued expenses and other liabilities 137.7 220.5
Prepaid reinsurance premiums 5.2 (11.2)
Reinsurance recoverables (9.8) (24.0)
Premiums receivable (340.5) (318.0)
Deferred acquisition costs (45.3) (48.2)
Income taxes (62.3) 159.3
Tax benefits from exercise/vesting of stock-based compensation 31.9 36.6
Other, net (54.5) 10.2
Net cash provided by operating activities 1,924.9 2,411.1
Cash Flows From Investing Activities
Purchases:
Fixed maturities (6,546.5) (5,194.8)
Equity securities (770.2) (590.2)
Sales:
Fixed maturities 4,591.4 4,028.9
Equity securities 35.2 825.2
Maturities, paydowns, calls and other:
Fixed maturities 402.9 474.2
Equity securities 158.7 78.2
Net (purchases) sales of short-term investments 462.7 (1,556.2)
Net unsettled security transactions 277.1 26.2
Purchases of property and equipment (132.4) (167.6)
Sale of property and equipment 36.1 --
Net cash used in investing activities (1,485.0) (2,076.1)
Cash Flows From Financing Activities
Proceeds from exercise of stock options 35.7 44.1
Payment of debt -- (200.0)
Dividends paid to shareholders (17.8) (17.3)
Acquisition of treasury shares (470.9) (139.4)
Net cash used in financing activities (453.0) (312.6)
Increase (decrease) in cash (13.1) 22.4
Cash, January 1 20.0 12.1
Cash, September 30 $6.9 $34.5


6

Notes to Consolidated Financial Statements
(unaudited)

Note 1 Basis of Presentation -- These financial statements and the notes thereto should be read in
conjunction with the Company’s audited financial statements and accompanying notes included in its
Annual Report on Form 10-K for the year ended December 31, 2004.

The consolidated financial statements reflect all normal recurring adjustments which, in the opinion of
management, were necessary for a fair statement of the results for the interim periods presented. The
results of operations for the period ended September 30, 2005, are not necessarily indicative of the
results expected for the full year.

Note 2 Stock-Based Compensation --The Company follows the provisions of Statement of Financial
Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation,” to account for its
stock compensation activity in the financial statements. Prior to January 1, 2003, the Company followed
the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to
Employees,” to account for its stock option activity.

The change to the fair value based method of accounting under SFAS 123 was applied prospectively to
all non-qualified stock option awards granted, modified, or settled after January 1, 2003. No stock
options were granted after December 31, 2002. As a result, there is no compensation cost for stock
options included in net income for 2003 and forward; however, compensation expense would have been
recognized if the fair value based method had been used for all awards since the original effective date
of SFAS 123 (January 1, 1995). Prior to 2003, the Company granted all options currently outstanding at
an exercise price equal to the market price of the Company’s Common Shares at the date of grant and,
therefore, under APB 25, no compensation expense was recorded.

The following table shows the effects on net income and earnings per share had the fair value based
method been applied to all outstanding and unvested stock option awards for the periods presented. The
Company used the modified Black-Scholes pricing model to calculate the fair value of the options
awarded as of the date of grant.
(millions, except per share amounts) Nine months ended
September 30,
2005 2004
Net income, as reported $1,112.3 $1,235.2
Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all stock
option awards, net of related tax effects (1.9) (4.5)
Net income, pro forma $1,110.4 $1,230.7

Earnings per share
Basic – as reported $5.64 $5.71
Basic – pro forma $5.63 $5.69

Diluted – as reported $5.56 $5.62
Diluted – pro forma $5.55 $5.62

In 2003, the Company began issuing restricted stock awards. Compensation expense for restricted stock
awards is recognized over the respective vesting periods. The current year expense is not representative
of the effect on net income for future years since each subsequent year will reflect expense for additional
awards.

7

Note 3 Supplemental Cash Flow Information -- The Company paid income taxes of $571.0 million and
$463.0 million during the nine months ended September 30, 2005 and 2004, respectively. Total interest
paid was $63.6 million and $70.3 million for the nine months ended September 30, 2005 and 2004,
respectively. Non-cash activity includes the liability for deferred restricted stock compensation and the
changes in net unrealized gains (losses) on securities.

Note 4 Debt -- Debt at September 30 consisted of:

(millions) 2005 2004
Market Market
Value Value
Cost Cost
7.30% Notes due 2006 $100.0 $101.9 $99.9 $106.9
6.375% Senior Notes due 2012 347.9 375.3 347.7 387.3
7% Notes due 2013 149.0 168.0 148.9 171.8
6 5/8% Senior Notes due 2029 294.2 334.1 294.1 320.6
6.25% Senior Notes due 2032 393.7 425.2 393.6 411.4
Other debt -- -- 6.0 6.0
$1,284.8 $1,404.5 $1,290.2 $1,404.0

Note 5 Comprehensive Income -- Total comprehensive income was $287.5 million and $448.7 million
for the quarters ended September 30, 2005 and 2004, respectively, and $1,057.5 million and $1,170.9
million for the nine months ended September 30, 2005 and 2004, respectively.

Note 6 Dividends -- On September 30, 2005, the Company paid a quarterly dividend of $.03 per
Common Share to shareholders of record as of the close of business on September 9, 2005. The Board
of Directors declared the dividend on August 19, 2005.

On October 7, 2005, the Board of Directors declared a quarterly dividend of $.03 per Common Share
payable December 31, 2005, to shareholders of record at the close of business on December 9, 2005.

Note 7 Segment Information -- The Company’s Personal Lines business units write insurance for private
passenger automobiles and recreation vehicles. The Commercial Auto business unit writes primary
liability and physical damage insurance for automobiles and trucks owned by small businesses. The
Company’s other-indemnity businesses primarily include writing professional liability insurance for
community banks and managing the Company’s run-off businesses. The Company’s other-service
businesses include providing insurance-related services, primarily processing business for Commercial
Auto Insurance Procedures/Plans (CAIP), which are state-supervised plans serving the involuntary
market. All revenues are generated from external customers.

8

Following are the operating results for the periods ended September 30:
(millions) Three Months Nine Months
2005 2004 2005 2004
Pretax Pretax Pretax Pretax
Profit Profit Profit Profit
Revenues (Loss) Revenues (Loss) Revenues (Loss) Revenues (Loss)

Personal Lines - Agency $2,010.4 $151.9 $1,959.2 $246.5 $6,001.7 $702.7 $5,776.5 $814.2
Personal Lines - Direct 1,036.7 118.0 926.1 131.0 3,028.4 385.8 2,701.6 398.3
Total Personal Lines1 3,047.1 269.9 2,885.3 377.5 9,030.1 1,088.5 8,478.1 1,212.5
Commercial Auto 425.1 65.2 384.0 70.3 1,232.3 220.9 1,101.2 229.1
Other-indemnity 6.7 (.9) 8.4 1.0 20.3 7.5 25.9 (.8)
Total underwriting operations 3,478.9 334.2 3,277.7 448.8 10,282.7 1,316.9 9,605.2 1,440.8
Other-service 9.7 3.3 12.1 6.2 31.2 12.8 36.6 18.6
Investments2 133.9 131.0 148.7 144.5 390.5 381.7 444.4 434.0
Interest expense -- (20.7) -- (20.1) -- (62.2) -- (60.3)
$3,622.5 $447.8 $3,438.5 $579.4 $10,704.4 $1,649.2 $10,086.2 $1,833.1

1
Personal automobile insurance accounted for 92% of the total Personal Lines segment net premiums earned in the third quarter and first
nine months of 2005, compared to 92% in the third quarter and 93% for the first nine months of 2004.
2
Revenues represent recurring investment income and net realized gains (losses) on securities; pretax profit is net of investment expenses.

The Company’s management uses underwriting margin and combined ratio as primary measures of
underwriting profitability. The underwriting margin is the pretax profit (loss) [calculated as net
premiums earned less losses and loss adjustment expenses, policy acquisition costs and other
underwriting expenses] expressed as a percent of net premiums earned (i.e., revenues). The combined
ratio is the complement of the underwriting margin. Following are the underwriting margins and
combined ratios for the Company’s underwriting operations for the periods ended September 30:

2005 2004 2005 2004
Under- Under- Under- Under-
writing Combined writing Combined writing Combined writing Combined
Margin Ratio Margin Ratio Margin Ratio Margin Ratio

Personal Lines - Agency 7.6% 92.4 12.6% 87.4 11.7% 88.3 14.1% 85.9
Personal Lines - Direct 11.4 88.6 14.1 85.9 12.7 87.3 14.7 85.3
Total Personal Lines 8.9 91.1 13.1 86.9 12.1 87.9 14.3 85.7
Commercial Auto 15.3 84.7 18.3 81.7 17.9 82.1 20.8 79.2
Other-indemnity1 NM NM NM NM NM NM NM NM
Total underwriting operations 9.6 90.4 13.7 86.3 12.8 87.2 15.0 85.0
1
Underwrting profit expressed as a percentage is not meaningful (NM) for the Company’s other-indemnity businesses due to the insignificant amount of
premiums earned by such businesses.

Note 8 Litigation -- The Company is named as defendant in various lawsuits arising out of its insurance
operations. All legal actions relating to claims made under insurance policies are considered by the
Company in establishing its loss and loss adjustment expense reserves.

In addition, the Company is named as defendant in a number of class action or individual lawsuits, the
outcomes of which are uncertain at this time. These cases include those alleging damages as a result of
the Company’s total loss evaluation methodology or handling, use of after-market parts, use of
consumer reports (such as credit reports) in underwriting and related notice requirements under the
federal Fair Credit Reporting Act, charging betterment in first party physical damage claims, the
adjusting of personal injury protection and medical payment claims, the use of preferred provider rates
for payment of personal injury protection claims, the use of automated database vendors or products to
assist in evaluating certain bodily injury claims, policy implementation and renewal procedures and
cases challenging other aspects of the Company’s claims and marketing practices and business
operations.

9

The Company plans to contest the outstanding suits vigorously, but may pursue settlement negotiations
where appropriate. In accordance with accounting principles generally accepted in the United States of
America (GAAP), the Company has established accruals for lawsuits as to which the Company has
determined that it is probable that a loss has been incurred and the Company can reasonably estimate its
potential exposure. Pursuant to GAAP, the Company has not established reserves for those lawsuits
where the loss is not deemed probable and/or the Company is currently unable to estimate the potential
exposure. If any one or more of these lawsuits results in a judgment against or settlement by the
Company in an amount that is significantly in excess of the reserve established for such lawsuit (if any),
the resulting liability could have a material effect on the Company’s financial condition, cash flows and
results of operations.

For a further discussion on the Company’s pending litigation, see “Item 3-Legal Proceedings” in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Note 9 New Accounting Standards -- On April 15, 2005, the Securities and Exchange Commission
issued an amendment to Rule 4-01(a) of Regulation S-X, which became effective April 21, 2005,
regarding the compliance date for SFAS 123 (revised 2004), “Share-Based Payment.” Pursuant to the
amendment, companies are not required to prepare financial statements in accordance with SFAS 123R
until the first quarter of the first fiscal year beginning after June 15, 2005, although earlier compliance is
permitted. The Company plans to adopt SFAS 123R on January 1, 2006, and, as a result, estimates that
net income will be reduced by approximately $.9 million in 2006. The Company will not incur any
additional expense relating to currently outstanding stock options in years subsequent to 2006, since the
final vesting date of stock options previously granted will be January 1, 2007. The Company does not
currently intend to issue additional stock options.

Note 10 Subsequent Event -- On October 24, 2005, Hurricane Wilma made landfall in Florida causing
catastrophic losses. As a result of this weather-related catastrophe, the Company will incur
approximately $73 million of losses in its October 2005 results. See the Company’s Management
Discussion and Analysis in this Quarterly Report on Form 10-Q for a more detailed discussion of third
quarter catastrophe losses.

10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW
For the third quarter 2005, The Progressive Corporation and subsidiaries (the “Company”) generated
solid growth and profitability, despite the significant weather-related catastrophes during the period. On
a companywide basis, net premiums written increased 5% and the Company generated a combined ratio
of 90.4 for the quarter. For the third quarter 2005, net income was $305.3 million, or $1.54 per share.

During the third quarter, the Company continued to see growth flatten, reflecting “soft market
conditions” (i.e., represents a highly competitive market where premium rates are relatively stable if not
decreasing). At September 30, 2005, the Company had 10 million policies in force on a companywide
basis, 10% more than at the same time last year reflecting solid increases in renewals offsetting an
overall slight decrease in new applications (i.e., completed sale of a new policy). Policy life expectancy,
which is one measure of retention, decreased in most of the Company’s personal auto tiers over the last
few months, but was relatively stable for commercial auto. The Company continued to experience a
decrease in its premiums per application on both new and renewal business, resulting from market
pricing refinements in several states. The Company continues to take actions it believes will enhance its
competitiveness and allow the Company to be ready for future growth if and when market conditions
change.

On September 30, 2005, the Company entered the New Jersey private passenger auto insurance market
through both its Agency and Direct distribution channels. The Company now writes business in 49
states and the District of Columbia. New Jersey represents the seventh largest private passenger auto
insurance market in the United States. Although the Company sees this as a growth opportunity, it is
also mindful of its objectives of maintaining profitable growth and high quality customer service. The
Company plans to offer its Commercial Auto products in the state later this year and add its motorcycle
and boat products in 2006.

The Company’s third quarter 2005 results were affected by several catastrophes, including Hurricanes
Katrina and Rita. Hurricane Katrina was by far the largest single claim event the Company has ever
experienced, and is currently estimated to be 5 ½ times greater than any previous single catastrophe loss.
Third quarter results included $173.6 million, or 5.0 points, of Hurricane Katrina losses and $11.9
million, or .3 points, of Hurricane Rita losses. In total, all catastrophes accounted for 5.6 loss ratio
points for the third quarter and 2.2 points on a year-to-date basis. Due to the nature of Hurricane
Katrina, the Company expects settlement of all losses to take longer than experienced for past storms.
The Company will continue to monitor the claims activity closely and adjust reserves as it deems
appropriate.

Through the end of October, losses related to Hurricane Katrina, net of estimated salvage, were
approximately $185 million; the estimated losses for Hurricane Rita were unchanged. The Company
estimates that it incurred $73 million of losses related to Hurricane Wilma, which primarily affected
Florida in October 2005.

The Company’s underwriting margins benefited from 2.7 points of favorable reserve development in the
third quarter 2005 and 2.9 points year-to-date. This favorable development reflects both actuarial
adjustments, as well as other favorable development (e.g., claims settling for less than reserved).

The Company is continuing to benefit from low accident frequency, consistent with the industry’s recent
experience. The Company has achieved consistency in its claims quality and processes which allowed it
to deploy claims representatives to the Gulf Coast region to assist with catastrophe claims. Through the
end of October, the Company has deployed more than 1,300 claims representatives and settled over 90%
of the Hurricane Katrina claims.

11

The Company made no substantial changes in the allocation of its investment portfolio during the
quarter. The Company’s investment portfolio produced a fully taxable equivalent total return of .9% for
the third quarter 2005 and 2.9% year-to-date, with positive total returns in both fixed-income securities
and common stocks for both periods. The Company continued to keep the portfolio’s credit quality high
and exposure to interest rate risk low. At September 30, 2005, the fixed-income portfolio duration was
2.9 years, with a weighted average credit quality of AA+.

FINANCIAL CONDITION
Capital Resources and Liquidity
Progressive's insurance operations create liquidity by collecting and investing premiums from new and
renewal business in advance of paying claims. For the nine months ended September 30, 2005,
operations generated a positive cash flow of $1,924.9 million. Operating cash flows decreased 20%
from the first nine months last year, primarily reflecting an increase in paid losses, mainly due to the
hurricanes, as well as timing differences associated with the payment of accrued expenses and a one-
time IRS refund in the first quarter of 2004. During the third quarter 2005, the Company entered into a
sale-leaseback arrangement for one of its buildings and is recognizing the estimated $1.5 million gain
over the lease term, in compliance with current applicable accounting guidance. During the third quarter
2005, the Company repurchased 855 thousand Common Shares at a total cost of $84.0 million (average
cost of $98.28 per share), bringing total year-to-date repurchases to 5.1 million shares, at a total cost of
$470.9 million (average cost of $92.38 per share).

The Company has substantial capital resources and believes it has sufficient borrowing capacity and
other capital resources to support current and anticipated growth and satisfy scheduled debt and interest
payments. The Company’s existing debt covenants do not include any rating or credit triggers.

Commitments and Contingencies
In June 2005, the Company completed the conversion of a building purchased in Austin, Texas into a
call center at an estimated total cost of $40.6 million, including the cost to purchase the building as well
as furniture, fixtures and equipment. The Company is currently constructing a data center in Colorado
Springs, Colorado at an estimated total cost of $66.7 million, and is looking to buy additional land near
this facility for future development. Construction on this data center is expected to be completed in
2006 and the facility is scheduled to become operational in 2007. The Company is also pursuing the
acquisition of additional land for future development to support corporate operations near its current
corporate headquarters in Mayfield Village, Ohio, with the intent to begin construction in 2006.

The Company currently has a total of 23 centers that provide concierge-level claims service, including 1
facility that is currently inoperable due to Hurricane Katrina and 1 facility that was opened in October
2005. The Company has previously announced a significant expansion of this service and is currently
researching, acquiring, and constructing additional sites around the country. The Company expects to
more than double the number of sites in the next two years, with a total of approximately 50 additional
facilities opened over the next several years. Three additional sites are expected to be opened later in the
fourth quarter 2005.

All such projects are, or will be, funded through operating cash flows.

Off-Balance-Sheet Arrangements
Except for open investment funding commitments, operating leases and service agreements discussed in
the notes to the financial statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2004, the Company does not have any off-balance-sheet leverage.

12

Contractual Obligations
During the third quarter 2005, the Company’s contractual obligations did not change materially from
those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

RESULTS OF OPERATIONS
Underwriting Operations
Growth
Growth over prior year
Quarter Year-to-date
Net premiums written 5% 7%
Net premiums earned 6% 7%

Auto policies in force (at Sept. 30) NA 10%
NA = Not Applicable

Companywide net premiums written represent the premiums generated from policies written during the
period less any premiums ceded to reinsurers. Net premiums earned, which are a function of the
premiums written in the current and prior periods, are earned into income using a daily earnings
convention.

The Company analyzes its growth by reviewing rate levels, new policies and customers, and the
retention characteristics of its books of business. During the third quarter 2005, the Company filed 51
auto rate revisions in various states, bringing the total to 142 for the year. The overall effect of these
revisions was a slight decrease in filed rates for the year. The Company will continue to assess market
conditions on a state-by-state basis, consider rate reductions in states where it will be able to maintain an
attractive combination of profit and growth while still maintaining service quality, and seek selective
rate increases where necessary to maintain rate adequacy.

In the Company’s Personal Lines business, new business applications were down slightly in the third
quarter 2005, but increased modestly on a year-to-date basis, as compared to the same periods last year.
Solid increases in renewal business helped contribute to the 10% increase in Personal Lines policies in
force. For the Company’s Commercial Auto business, new applications increased in both the third
quarter 2005 and year-to-date.

Customer retention is another factor that affects growth. One way to analyze retention is through policy
life expectancy (PLE), which is the estimate of the average length of time that the Company expects all
of its policies issued in the month to remain in force before cancellation or non-renewal. Similar to loss
reserves, PLE’s develop over time and include many factors, such as product, channel, tier and bill plan.
As a result, it is difficult to report retention on a companywide basis and specifically identify the cause
of changes in such estimates. Nevertheless, with a greater percentage of the Company’s premium
coming from renewal business, increasing retention remains an area where the Company is continuing to
focus its efforts.

13

Profitability
Profitability of the Company’s underwriting operations is defined by pretax underwriting profit, which is
calculated as net premiums earned less losses and loss adjustment expenses, policy acquisition costs and
other underwriting expenses. The Company also uses underwriting profit margin, which is underwriting
profit expressed as a percent of net premiums earned, to analyze the Company’s results. For the three
and nine month periods ended September 30, the Company’s underwriting profitability measures were
as follows:
(millions) 2005 2004 2005 2004
Underwriting Underwriting Underwriting Underwriting
Profit (Loss) Profit (Loss) Profit (Loss) Profit (Loss)
$ Margin $ Margin $ Margin $ Margin
Personal Lines - Agency $151.9 7.6% $246.5 12.6% $702.7 11.7% $814.2 14.1%
Personal Lines - Direct 118.0 11.4 131.0 14.1 385.8 12.7 398.3 14.7
Total Personal Lines 269.9 8.9 377.5 13.1 1,088.5 12.1 1,212.5 14.3
Commercial Auto 65.2 15.3 70.3 18.3 220.9 17.9 229.1 20.8
Other-indemnity1 (.9) NM 1.0 NM 7.5 NM (.8) NM
Total underwriting operations $334.2 9.6% $448.8 13.7% $1,316.9 12.8% $1,440.8 15.0%

1
Underwrting profit margin is not meaningful (NM) for the Company’s other-indemnity businesses due to the insignificant amount of premiums earned by
such businesses.

The decrease in the underwriting margins for the third quarter 2005 reflects the higher losses incurred as
a result of the significant catastrophes during the period, partially offset by favorable reserve
development and lower expense ratios. Due to the nature and location of Hurricane Katrina, the Agency
business results were more negatively affected than the Direct business. The storm significantly
affected the Company’s special lines products, particularly the boat product, which are primarily written
through the Agency channel. In addition, approximately 85% of Louisiana’s personal auto business is
written through independent agents.

14

Further underwriting results for the Company’s Personal Lines businesses, including its channel
components, the Commercial Auto business and other-indemnity businesses, were as follows (details
discussed below):
(dollars in millions)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 Change 2005 2004 Change
NET PREMIUMS WRITTEN
Personal Lines – Agency $2,024.4 $2,002.9 1% $6,172.5 $5,967.5 3%
Personal Lines – Direct 1,079.4 981.2 10% 3,198.4 2,847.4 12%
Total Personal Lines 3,103.8 2,984.1 4% 9,370.9 8,814.9 6%
Commercial Auto 447.3 395.9 13% 1,367.6 1,191.8 15%
Other – indemnity 5.8 6.9 (16)% 17.3 19.1 (9)%
Total underwriting operations $3,556.9 $3,386.9 5% $10,755.8 $10,025.8 7%

NET PREMIUMS EARNED
Personal Lines – Agency $2,010.4 $1,959.2 3% $6,001.7 $5,776.5 4%
Personal Lines – Direct 1,036.7 926.1 12% 3,028.4 2,701.6 12%
Total Personal Lines 3,047.1 2,885.3 6% 9,030.1 8,478.1 7%
Commercial Auto 425.1 384.0 11% 1,232.3 1,101.2 12%
Other – indemnity 6.7 8.4 (20)% 20.3 25.9 (22)%
Total underwriting operations $3,478.9 $3,277.7 6% $10,282.7 $9,605.2 7%

PERSONAL LINES – AGENCY
Loss and loss adjustment expense ratio 73.0 67.3 (5.7) pts. 68.0 65.8 (2.2) pts.
Underwriting expense ratio 19.4 20.1 .7 pts. 20.3 20.1 (.2) pts.
Combined ratio 92.4 87.4 (5.0) pts. 88.3 85.9 (2.4) pts.

PERSONAL LINES – DIRECT
Underwriting expense ratio 19.8 19.9 .1 pts. 19.9 20.6 .7 pts.

PERSONAL LINES – TOTAL

COMMERCIAL AUTO
Underwriting expense ratio 19.2 19.3 .1 pts. 19.8 19.1 (.7) pts.

TOTAL UNDERWRITING OPERATIONS

COMPANYWIDE ACCIDENT YEAR

POLICIES IN FORCE September September
(in thousands) 2005 2004 Change
Agency – Auto 4,508 4,236 6%
Direct – Auto 2,305 2,050 12%
Other Personal Lines1 2,684 2,350 14%
Total Personal Lines 9,497 8,636 10%
Commercial Auto 464 413 12%

1
Includes insurance for motorcycles, recreation vehicles, mobile homes, watercraft, snowmobiles and similar items.

15

Loss and Loss Adjustment Expense Reserves
Claims costs, the Company’s most significant expense, represent payments made, and estimated future
payments to be made, to or on behalf of its policyholders, as well as expenses needed to adjust or settle
claims. These costs include an estimate for costs related to assignments, based on current and prior
writings, under state-mandated automobile insurance programs. Claims costs are influenced by changes
in loss severity and frequency, among other factors. Accordingly, anticipated changes in these factors
are taken into account when the Company establishes premium rates and loss reserves.

During the third quarter and first nine months of 2005, the Company continued to report historically low
loss ratios, despite the significant catastrophic losses incurred during the third quarter. During the third
quarter 2005, the Company incurred $194.4 million, or 5.6 loss ratio points, for all catastrophes, of
which nearly 90% ($173.6 million) related to Hurricane Katrina. Through the end of October, losses
related to Hurricane Katrina, net of estimated salvage, are estimated to be $185 million. For the nine
months ended September 30, 2005, the Company’s total catastrophe losses were $221.2 million, or 2.2
loss ratio points. For the third quarter and first nine months of 2004, the Company incurred $53.8
million, or 1.6 points, and $73.5 million, or .8 points, respectively, of catastrophic weather-related
losses.

Auto accident frequency remained favorable during the quarter. In general, the Company continues to
experience frequency trends similar to the rest of the industry in nearly every coverage. In addition, in
the week or so following Hurricane Katrina, the Company experienced reduced claims throughout the
country. The Company will continue to analyze these trends to distinguish changes in its experience
from external factors, such as the cost of gasoline, versus those resulting from shifts in the mix of the
Company’s business.

The Company experienced an increase in severity during the third quarter 2005, compared to the same
period last year. Part of the increase reflects the greater severity the Company incurred from Hurricane
Katrina due to the nature of the storm (e.g., greater flood damage than experienced in prior storms).
Reviewing the Company’s severity trends on a trailing 12-month basis through the second quarter 2005,
the Company experienced increases in severity greater than that reported by the industry. The Company
has seen injury loss severities increase over the same quarter last year, but at a lower rate than the
Company experienced in prior quarters. In general, the Company is seeing severity trends in most
coverages no longer being offset entirely by lower frequency. The Company plans to continue to be
diligent in its efforts to recognize trend when setting rates and establishing loss reserves.

During the third quarter 2005, the Company maintained adequacy in its claims quality, as indicated by
the Company’s internal audit of claims files. The result of achieving more consistency in claims quality
and process allowed the Company to more effectively deploy over 1,300 claims representatives to the
Gulf Coast to assist with catastrophe claims. Due to the unusual circumstances surrounding Hurricane
Katrina and the nature of the storm, the Company was able to settle only approximately 50% of the
claims by the end of the third quarter. By the end of October, over 90% of Hurricane Katrina claims
were settled.

16

The Company reported the following loss reserve development for the periods ended September 30:

2005 2004 2005 2004
Actuarial Adjustments
Favorable/(Unfavorable)
Prior accident years $29.6 $5.4 $98.6 $31.1
Current accident year 41.1 (16.4) 52.1 (24.8)
Calendar year actuarial adjustment $70.7 $(11.0) $150.7 $6.3

Prior Accident Years Development
Favorable/(Unfavorable)
Actuarial adjustment $29.6 $5.4 $98.6 $31.1
All other development 64.3 55.8 197.8 44.3
Total development $93.9 $61.2 $296.4 $75.4

During the third quarter and first nine months of 2005, the Company experienced 2.7 points and 2.9
points, respectively, of favorable loss reserve development, compared to 1.9 points and .8 points for the
same periods last year. Total development consists both of actuarial adjustments and “all other
development.” The actuarial adjustments represent the net changes made by the Company to both
current and prior accident year reserves based on regularly scheduled reviews. The “all other
development” represents claims settling for more or less than reserved, emergence of unreported claims
at rates different than reserved and changes in reserve estimates by claims representatives. The
continued recognition of lower severity for prior accident years than had been previously estimated
contributed to the favorable prior year reserve development in 2005. For the first nine months of 2004,
the favorable development was partially offset by unfavorable development in the Company’s personal
auto product due to a greater number of late reported claims than anticipated. The Company continues
to increase the analysis intensity of its loss reserves to increase accuracy and further understand its
business, as evidenced by the fact that the Company has reduced loss reserves following actuarial
reviews more during 2005 than in any prior year-to-date period. A detailed discussion of the
Company’s loss reserving practices can be found in its Report on Loss Reserving Practices, which was
filed in a Form 8-K on June 28, 2005.

Underwriting Expenses
Other underwriting expenses and policy acquisition costs expressed as a percent of premiums earned
were lower for both the third quarter and first nine months of 2005, as compared to the same periods last
year. During the third quarter 2005, the Company benefited .3 points (.1 points year-to-date) from the
settlements of state tax liabilities. The “other underwriting expenses,” as shown on the income
statement, reflect increases in salaries and other infrastructure costs consistent with premium growth.

17

Personal Lines
The Company’s Personal Lines business units write insurance for private passenger automobiles and
recreation vehicles, and represent 87% of the Company’s total year-to-date net premiums written.
Personal Lines net premiums written and earned grew 4% and 6%, respectively, for the third quarter and
6% and 7%, respectively, for the first nine months of 2005, compared to the same periods last year. The
Personal Lines business is comprised of the Agency business and the Direct business.

The Agency Business

Auto policies in force (at Sept. 30) NA 6%
NA=Not Applicable

The Agency business includes business written by more than 30,000 independent insurance agencies
that represent the Company, as well as brokerages in New York and California. The Agency auto
business saw a decrease in new applications in both the third quarter and first nine months of 2005
(about 6% and 3%, respectively), as compared to the same periods last year, reflecting soft market
conditions. Premiums per application were lower on both new and renewal business for both the third
quarter and year-to-date as compared to last year. Both the conversion rate (the percentage of quotes
resulting in a sale) and number of quotes were down for the third quarter 2005, compared to the same
period last year. For the first nine months of 2005, the conversion rate and number of quotes were flat,
compared to the same period last year. In the Agency auto tiers, the Company has seen retention
decline over the last few months but still remained greater than September 2004.

The Agency expense ratio decreased .7 points for the third quarter as compared to the same period last
year, primarily reflecting the effect of favorable state tax liability settlements in 2005 and costs incurred
in the third quarter of 2004 related to the launch of Drive® Insurance from Progressive, the new Agency
brand. On a year-to-date basis, the Agency expense ratio increased .2 points primarily due to a
substantial increase in advertising costs associated with the roll out of the Drive Insurance from
Progressive brand. Drive commercials are now airing nationally. The Company anticipates that greater
brand identity, coupled with its product offerings, systems, and claims and customer service, will
support growth in the Agency channel.

The Direct Business

NA 12%
Auto policies in force (at Sept. 30)
NA=Not Applicable

The Direct business includes business written directly by the Company over the telephone and on the
Internet. The Direct business experienced an increase in new applications in both the third quarter and
first nine months of 2005 (about 4% and 11%, respectively). In the third quarter 2004, the Direct
business improved its Internet quoting platform by decreasing the amount of time required to complete a
quote, which contributed to new application growth through the second quarter 2005. Premiums per

18

application were lower on both new and renewal business for both the third quarter and year-to-date.
For the same periods, the conversion rate on the Direct business was down from last year; however, the
number of quotes increased, which the Company believes resulted from the effectiveness of the
Progressive Direct SM advertising campaign. The use of the Internet, either for complete or partial
quoting, continues to grow and is the most significant source of new business activity in the Direct
channel. In the Direct auto tiers, retention has decreased over the last few months and was generally
down compared to last year.

The Direct expense ratio decreased .1 points and .7 points for the third quarter and first nine months of
2005, respectively, as compared to the same periods last year, primarily reflecting a higher percentage of
renewal business. During the third quarter, the Company significantly increased its advertising of the
Progressive Direct brand, as compared to the same period last year, reflecting more targeted media
buying driven by the favorable response the Company has been experiencing. The Progressive Direct
marketing efforts continue to emphasize the ease of doing business with Progressive and credible price
comparisons provided to consumers. The Company advertises its Direct brand on a national basis and
supplements that coverage by local market media campaigns in over 100 designated market areas.

Commercial Auto

Policies in force (at Sept. 30) NA 12%
NA=Not Applicable

The Company’s Commercial Auto business unit writes primary liability and physical damage insurance
for automobiles and trucks owned by small businesses, with the majority of its customers insuring three
or fewer vehicles. The Commercial Auto business represents 13% of the Company’s total year-to-date
net premiums written. Although Commercial Auto differs from Personal Lines auto in its customer base
and products written, both businesses require the same fundamental skills, including disciplined
underwriting and pricing, as well as excellent claims service. The Company’s Commercial Auto
business is primarily distributed through the independent agency channel.

The Company experienced solid growth in Commercial Auto during the quarter. The Commercial Auto
business expanded into New Hampshire during the year, bringing the total number of markets to 46, and
plans on entering New Jersey later this year and one, possibly two, additional states in 2006.
Approximately 52% of the Company’s year-to-date Commercial Auto net premiums written were
generated in the specialty commercial auto market, which includes dump trucks, logging trucks and
other short-haul commercial vehicles. The remainder of the business was written in the light and local
commercial auto markets, which include autos, vans and pick-up trucks used by artisans, such as
contractors, landscapers and plumbers, and a variety of other small businesses. There are many
similarities between the Company’s Commercial Auto and Personal Lines auto businesses; however,
since the Commercial Auto policies have higher limits (up to $1 million) than Personal Lines auto, the
Company analyzes the limit differences in this product more closely.

New applications increased about 8% and 6% in the Commercial Auto business over the third quarter
and first nine months of 2004, respectively. Premiums per application were higher on new business for
both the third quarter and first nine months of 2005, as compared to the same periods last year, partially
reflecting Commercial Auto’s shift from 6-month to 12-month policies, which has a favorable effect on
premiums per application; this shift started at the end of the first quarter 2004 and was substantially
completed in the second quarter 2005. For renewal business, premiums per application increased
19

slightly for the third quarter 2005 and were relatively flat on a year-to-date basis, as compared to the
same periods last year. During the third quarter 2005, the Company filed 12 commercial auto rate
revisions in various states, bringing the total to 27 for the year. The overall effect of these revisions was
a very slight increase in filed rates for the year. In the Commercial Auto tiers, retention has remained
relatively flat over the last few months, but has lengthened in every tier over September 2004. The
expense ratio in this business decreased .1 points from the third quarter last year. For the year-to-date
period, the Commercial Auto expense ratio increased .7 points from last year, partially due to the
branding of Commercial Auto under Drive Insurance from Progressive, as well as increased involuntary
market assessments in the first quarter 2005, as compared to the prior year.

Other Businesses
Indemnity
The Company’s other-indemnity businesses, which represent less than .2% of year-to-date net premiums
written, primarily include writing professional liability insurance for community banks and the
Company’s run-off businesses. These businesses generated an underwriting profit (loss) of $(.9) million
and $7.5 million for the third quarter and first nine months of 2005, respectively, compared to $1.0
million and $(.8) million, respectively, for the same periods last year. The underwriting profit (loss) in
these businesses may fluctuate due to the uncertain nature of these products, which may include
actuarial adjustments, other reserve development and other costs associated with the run-off businesses.

Service
The other-service businesses primarily provide policy issuance and claims adjusting services for state
Commercial Auto Insurance Procedures/Plans (CAIP), which are state-supervised plans serving the
involuntary market. Service revenues decreased in both the third quarter and first nine months of 2005,
as compared to the same periods last year, reflecting declining CAIP business and the reentry of a
servicing carrier into the New Jersey CAIP market during the third quarter 2004. These service
businesses generated an operating profit of $3.3 million and $12.8 million for the third quarter and first
nine months of 2005, respectively, compared to $6.2 million and $18.6 million for the same periods last
year.

Income Taxes
The Company's income tax position, which includes both deferred taxes and income taxes payable,
shifted to a net asset at September 30, 2005, as compared to a net liability for prior periods. The shift
was partially due to lower net unrealized gains at the end of the quarter, compared to year-end, which
reduced the Company's deferred tax liability, as well as the decrease in income taxes payable, reflecting
the decrease in the provision for income taxes for the quarter, as compared to prior periods.

20

Investments
Portfolio Allocation
The composition of the investment portfolio at September 30 was:
Gross Gross % of
Unrealized Unrealized Total Duration
(millions) Market
Cost
Rating1
Gains Losses Portfolio (Years)
Value
2005
Fixed maturities $10,420.3 $70.7 $(93.2) $10,397.8 71.6% 3.1 AA+
Preferred stocks 1,188.2 16.2 (11.6) 1,192.8 8.2 2.3 A-
Short-term investments2 918.9 .3 -- 919.2 6.3 <1 AA+
Total fixed income 12,527.4 87.2 (104.8) 12,509.8 86.1 2.9 AA+
Common equities 1,413.0 616.1 (12.2) 2,016.9 13.9 NM NM
Total portfolio3 $13,940.4 $703.3 $(117.0) $14,526.7 100.0% 2.9 AA+
2004
Fixed maturities $9,534.0 $180.3 $(33.2) $9,681.1 67.6% 3.5 AA+
Preferred stocks 723.4 27.5 (3.7) 747.2 5.2 3.0 A-
Short-term investments2 2,204.2 -- -- 2,204.2 15.4 <1 AA
Total fixed income 12,461.6 207.8 (36.9) 12,632.5 88.2 2.9 AA+
Common equities 1,312.1 391.2 (16.6) 1,686.7 11.8 NM NM
Total portfolio3 $13,773.7 $599.0 $(53.5) $14,319.2 100.0% 2.9 AA+

NM = Not Meaningful
1
Credit quality ratings are assigned by nationally recognized securities rating organizations. To calculate the weighted
average credit quality ratings, the Company weights individual securities based on market value and assigns a numeric score
to each credit rating based on a scale from 0-5.
2
Short-term investments include Eurodollar deposits, commercial paper, auction rate securities and other investments, which
are expected to be liquidated within one year.
3
The Company had net unsettled security acquisitions of $309.0 million and $101.3 million at September 30, 2005 and 2004,
respectively. September 30, 2005 and 2004 totals include $1.1 billion and $2.1 billion, respectively, of securities in the
portfolio of a consolidated, non-insurance subsidiary of the holding company. In 2004, the balance includes additional funds
held in this subsidiary for the pending settlement of the Company’s tender offer.

As of September 30, 2005, the Company’s portfolio had $586.3 million of net unrealized gains,
compared to $545.5 million at September 30, 2004 and $669.4 million at December 31, 2004. During
the third quarter 2005, the fixed-income portfolio’s valuation decreased $96.5 million reflecting the
increase in market interest rates during the period. On the other hand, the common stock portfolio had
an increase of $69.6 million during the third quarter, reflecting movement in the market.

Fixed-Income Securities
The fixed-income portfolio, which includes fixed-maturity securities, preferred stocks and short-term
investments, had a duration of 2.9 years at September 30, 2005, December 31, 2004, and September 30,
2004. After adjustments to exclude net unsettled securities transactions, the allocation of fixed-income
securities at September 30, 2005, was 85.8% of the total portfolio, compared to 88.1% at September 30,
2004.

21

The fixed-maturity securities and short-term investments, as reported in the balance sheets, were
comprised of the following:
(millions) September 30, 2005 September 30, 2004
Investment-grade fixed maturities:
Short/intermediate term $11,052.1 97.7% $11,678.7 98.3%
Long term1 126.3 1.1 118.3 1.0
Non-investment-grade fixed maturities 138.6 1.2 88.3 .7
Total $11,317.0 100.0% $11,885.3 100.0%

1
Long term includes securities with maturities of 10 years or greater.

Included in the fixed-income portfolio are $2.5 billion of asset-backed securities. These asset-backed
securities were comprised of residential mortgage-backed ($.4 billion), commercial mortgage-backed
($1.0 billion) and other asset-backed ($1.1 billion) securities, with a duration of 1.7 years and a weighted
average credit quality of AAA-. The largest components of other asset-backed securities were automobile
receivable loans ($.7 billion) and home equity loans ($.2 billion). Substantially all asset-backed securities
are liquid with available market quotes and contain no residual interests (the most subordinated class in a
pool of securitized assets).

Common Equities
Common equities, as reported in the balance sheets, were comprised of the following:
(millions) September 30, 2005 September 30, 2004
Common stocks $1,994.4 98.9% $1,648.5 97.7%
Other risk investments 22.5 1.1 38.2 2.3
Total common equities $2,016.9 100.0% $1,686.7 100.0%

Common equities comprised 14.2% and 11.9% of the total portfolio, excluding the net unsettled
securities transactions, at September 30, 2005 and 2004, respectively. Common stocks are the majority
of the common equity portfolio and are managed externally to track the Russell 1000 index within +/- 50
basis points annually. To maintain high correlation with the Russell 1000, the Company held
approximately 70% of the common stocks comprising the index at September 30, 2005. Individual
holdings are measured based on their contribution to the correlation with the index. The Company’s
common equity allocation and management strategy are intended to provide diversification for the total
portfolio and focus on changes in value of the equity portfolio relative to the change in value of the
index. For the third quarters and first nine months of 2005 and 2004, the GAAP return was within the
designated tracking error.

Other risk investments include private equity investments and limited partnership interests in private
equity and mezzanine investment funds, which have no off-balance-sheet exposure or contingent
obligations, except for $4.8 million of open funding commitments at September 30, 2005.

Trading Securities
Trading securities are entered into for the purpose of near-term profit generation. At September 30,
2005 and 2004, the Company did not have any trading securities, with the exception of the derivatives
classified as trading discussed below. The Company had no trading security gains or losses during the
third quarters and first nine months of 2005 and 2004.

22

Derivative Instruments
From time to time, the Company invests in derivative instruments, which are primarily used to manage
the risks of the available-for-sale portfolio. This is accomplished by modifying the basis, duration,
interest rate or foreign currency characteristics of the portfolio, hedged securities or hedged cash flows.
The Company had no risk management derivatives at September 30, 2005 or 2004. The Company
recognized no gains or losses during the third quarters and first nine months of 2005 or 2004 on risk
management derivatives.
Derivative instruments may also be used for trading purposes or classified as trading derivatives due to
characteristics of the transaction. During the third quarter 2005, the Company held three credit default
protection derivatives, which were sold on three separate issuers and matched with Treasury securities
with an equivalent principal and maturity to replicate cash bond positions. These positions had a
notional amount of $75.0 million at September 30, 2005. The Company held similar investments in
2004, all of which were closed during the third quarter 2004. For the third quarter and first nine months
of 2005, these positions generated a net gain (loss) of $(1.3) million and $.6 million, respectively,
compared to $1.7 million and $(1.4) million for the third quarter and first nine months of 2004. The
amount and results of the derivative and Treasury positions are immaterial to the Company’s financial
condition, cash flows and results of operations and are reported as part of the available-for-sale
portfolio, with the net gains (losses) reported as a component of net realized gains (losses) on securities.

Investment Income
Recurring investment income (interest and dividends before investment and interest expenses) increased
11% for the third quarter, compared to the same periods last year, reflecting the change in yield as a
result of investing new cash and portfolio turnover at higher rates in the current interest rate
environment. For the first nine months of 2005, recurring investment income increased 7%, reflecting
both growth in the portfolio and the increase in yields. Investment expenses decreased from the prior
year primarily due to the costs associated with the Company’s 2004 tender offer.

The Company reports total return to reflect more accurately management’s philosophy of the portfolio
and evaluation of the investment results. The fully taxable equivalent (FTE) total return includes
recurring investment income grossed up for certain tax-preferential investments (e.g., municipal debt)
and net realized gains (losses) and changes in unrealized gains (losses) on securities. The Company
reported the following investment results for the periods ended September 30:

2005 2004 2005 2004
Pretax recurring investment book yield 4.1% 3.7% 4.0% 3.8%
Weighted average FTE book yield 4.7% 4.3% 4.6% 4.4%
FTE total return:
Fixed-income securities .4% 2.5% 2.6% 3.3%
Common stocks 4.3% (1.8)% 4.7% 1.4%
Total portfolio .9% 1.9% 2.9% 3.1%

23

Realized Gains/Losses
The components of net realized gains (losses) for the periods ended September 30 were:

(millions) Three Months Nine Months
2005 2004 2005 2004
Gross realized gains:
Fixed maturities $6.1 $29.2 $46.3 $87.6
Preferred stocks -- .3 -- 7.9
Common equities 4.6 27.7 11.8 50.3
Short-term investments .1 -- .1 .1
10.8 57.2 58.2 145.9
Gross realized losses:
Fixed maturities 12.0 3.0 36.2 14.4
Preferred stocks -- 9.8 -- 9.8
Common equities 2.9 20.5 19.7 41.5
Short-term investments -- -- -- .2
14.9 33.3 55.9 65.9
Net realized gains (losses) on securities:
Fixed maturities (5.9) 26.2 10.1 73.2
Preferred stocks -- (9.5) -- (1.9)
Common equities 1.7 7.2 (7.9) 8.8
Short-term investments .1 -- .1 (.1)
$(4.1) $23.9 $2.3 $80.0
Per share $(.01) $.07 $.01 $.24

The gross realized gains and losses during the quarter were primarily the result of market driven interest
rate movements and sector allocation changes as part of ordinary investment operations. Gross realized
losses also included write-downs of both fixed-income and equity securities determined to be other-
than-temporarily impaired.

Other-Than-Temporary Impairment (OTI)
From time to time, realized losses include write-downs of securities determined to have an other-than-
temporary decline in market value. The Company routinely monitors its portfolio for pricing changes
that might indicate potential impairments and performs detailed reviews of securities with unrealized
losses based on predetermined criteria. In such cases, changes in market value are evaluated to
determine the extent to which such changes are attributable to (i) fundamental factors specific to the
issuer, such as financial conditions, business prospects or other factors, or (ii) market-related factors,
such as interest rates or equity market declines.

Fixed-income and equity securities with declines attributable to issuer-specific fundamentals are
reviewed to identify all available evidence, circumstances and influences to estimate the potential for,
and timing of, recovery of the investment’s impairment. An other-than-temporary impairment loss is
deemed to have occurred when the potential for, and timing of, recovery does not satisfy the current
applicable accounting guidance.

For fixed-income investments with unrealized losses due to market or industry-related declines where
the Company does not have the intent and ability to hold the investment for the period of time necessary
to recover a significant portion of the investment’s original principal and interest obligation, declines are
deemed to qualify as other than temporary. The Company's policy for common stocks with market-
related declines is to recognize impairment losses on individual securities with losses that are not
reasonably expected to be recovered under historical market conditions when the security has been in a
loss position for three consecutive quarters.

24

When a security in the Company’s investment portfolio has a decline in market value that is deemed to
be other than temporary, the Company reduces the book value of such security to its current market
value, recognizing the decline as a realized loss in the income statement. All other unrealized gains or
losses are reflected in shareholders' equity. The OTI write-down activity for the periods ended
September 30 was as follows:

(millions) Write- Write-downs Write- Write-downs
downs On downs On
Total On Securities Total On Securities
Write- Securities Held at Write- Securities Held at
2005 downs Sold Period End downs Sold Period End
Fixed income $1.0 $-- $1.0 $11.0 $5.1 $5.9
Common equities 2.7 -- 2.7 4.3 -- 4.3
Total portfolio $3.7 $-- $3.7 $15.3 $5.1 $10.2
2004
Fixed income $-- $-- $-- $-- $-- $--
Common equities .5 -- .5 1.4 -- 1.4
Total portfolio $.5 $-- $.5 $1.4 $-- $1.4

The following table stratifies the gross unrealized losses in the Company’s portfolio at September 30,
2005, by length of time in a loss position and magnitude of the loss as a percentage of book value. The
individual amounts represent the additional OTI the Company could have recognized in the income
statement if its policy for market-related declines was different than that stated above.

(millions) Total Gross Decline of Investment Value
Unrealized
Total Portfolio Losses >15% >25% >35% >45%
Unrealized loss for 1 quarter $32.6 $-- $-- $-- $--
Unrealized loss for 2 quarters 11.0 .5 .1 -- --
Unrealized loss for 3 quarters 14.7 .3 .2 -- --
Unrealized loss for 1 year or longer 58.7 .1 .1 .1 .1
$117.0 $.9 $.4 $.1 $.1

For example, if the Company had decided to write down all securities in an unrealized loss position for
one year or longer where the securities decline in value exceeded 25%, the Company would have
recognized an additional $.1 million of OTI losses in the income statement.

The Company also reviews securities in unrealized loss positions in accordance with Emerging Issues
Task Force 03-1, “The Meaning of Other-Than-Temporary Impairments.” At September 30, 2005, the
gross unrealized loss of $117.0 million (on securities with a market value of $8,303.3 million) included
$58.7 million of unrealized losses on securities in a loss position for one year or longer (market value of
$2,327.1 million). The Company determined that none of these securities met the criteria for other-than-
temporary impairment write-downs.

Since total unrealized losses are already a component of the Company’s shareholders’ equity, any
recognition of additional OTI losses would have no effect on the Company’s comprehensive income or
book value.

25

Repurchase Transactions
During the quarter, the Company entered into repurchase commitment transactions, whereby the
Company loans Treasury or U.S. Government agency securities to accredited brokerage firms in
exchange for cash equal to the fair market value of the securities. These internally managed transactions
are typically overnight arrangements. The cash proceeds are invested in AA or higher financial
institution paper with yields that exceed the Company’s interest obligation on the borrowed cash. The
Company is able to borrow the cash at low rates since the securities loaned are in short supply. The
Company’s interest rate exposure does not increase or decrease since the borrowing and investing
periods match. During the three months ended September 30, 2005, the Company’s largest single
outstanding balance of repurchase commitments was $1.7 billion open on 3 separate business days, with
an average daily balance of $1.0 billion for the quarter. The Company had no open repurchase
commitments at September 30, 2005 and 2004. The Company earned income of $1.3 million and $.4
million on repurchase commitments during the three months ended September 30, 2005 and 2004,
respectively, and earned $2.8 million and $1.3 million for the nine months ended September 30, 2005
and 2004, respectively.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Statements in this
quarterly report on Form 10-Q that are not historical fact are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual events and results to differ materially from those discussed
herein. These risks and uncertainties include, without limitation, uncertainties related to estimates, assumptions
and projections generally; inflation and changes in economic conditions (including changes in interest rates and
financial markets); the accuracy and adequacy of the Company’s pricing and loss reserving methodologies;
pricing competition and other initiatives by competitors; the Company’s ability to obtain regulatory approval for
requested rate changes and the timing thereof; the effectiveness of the Company’s advertising campaigns;
legislative and regulatory developments; disputes relating to intellectual property rights; the outcome of litigation
pending or that may be filed against the Company; weather conditions (including the severity and frequency of
storms, hurricanes, snowfalls, hail and winter conditions); changes in driving patterns and loss trends; acts of
war and terrorist activities; the Company’s ability to maintain the uninterrupted operation of its facilities,
systems (including information technology systems) and business functions; court decisions and trends in
litigation and health care and auto repair costs; and other matters described from time to time by the Company in
releases and publications, and in periodic reports and other documents filed with the United States Securities and
Exchange Commission. In addition, investors should be aware that generally accepted accounting principles
prescribe when a company may reserve for particular risks, including litigation exposures. Accordingly, results
for a given reporting period could be significantly affected if and when a reserve is established for one or more
contingencies. Reported results, therefore, may appear to be volatile in certain accounting periods.

26

Progressive 3Q 05 QSR

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